Forex Strategies

Talking Points:

• Forex tips for finding support and resistance levels.
• Learn to enter Forex breakouts using Donchian Channels.
• Complete a breakout trading plan with stop orders.

The Forex market is known for its strong trends, which can make trading a breakout strategy an effective approach to the markets. Normally the first step of any breakout strategy is to identify the key levels of support and resistance for a currency pair. Today we are going to review using Donchian Channels for just that purpose, while complete a trading setup on the GBPUSD.
Let’s get started!

Learn Forex – GBPUSD Price Channels




Trading Donchian Channels

Donchian Channels can be applied to any chart to extrapolate current levels of support and resistance. They do this by clearly identify the high and low on a graph created during the selected number of periods. Above we can see the Donchian Channels applied to a GBPUSD 4Hour chart, using a 20 period setting. The channel lines highlight the current 20 periods high and low values, which can be used as support and resistance when trading breakouts. Breakout traders in a downtrend will look for price to break below the lower channel prior to creating new entries in the direction of the trend. The same is true in an uptrend, where traders will identify the upper channel as a potential area to enter the market.

Since the price of the GBPUSD has declined as much as 346 pips for the month of October, many traders will want to identify new entries to sell the pair on a breakout towards lower lows. With our current low already identified by the Donchian Channels at 1.5913, traders can begin preparing for a breakout below this value. As pictured below, you can find a sample breakout setup. Entry orders to sell the GBPUSD can be placed at a minimum of one pip below support, so traders enter the market on a breakout to lower lows.

Learn Forex – GBPUSD 4Hour Breakout




Setting Risk

As with any strategy, breakout traders should incorporate stops into their trading. When using Donchian Channels, this process can be made very easy. Remember how the top pricing channel (representing the 20 period high), acts as an area of resistance? In a downtrend price is expected to make lower lows and stay below this value. If a new high is created, with a breach of the upper channel, traders will want to exit their positions. Traders may also want to manually tail and move their stop order to lock in profit as the trend continues. On trading tip breakout traders can employ is moving this preset stop along with the decreasing pricing channel as the trade moves in their favor.


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Talking Points:

• Longer-term moves capture price moves caused by fundamental shifts
• Prices are not random and outlier moves are often extended
• Money seeking the most favorable trade will often develop extended trends
• You need to be able to determine when to trade trends and when not to

Traders who look for a system that is low maintenance while allowing for access to nice market moves often turn to trend trading. Trend trading is a method that allows you to take advantage of the big market moves while ignoring the small moves in hopes of making money often capturing the big move. However, it’s important to note that this trend trading should only be utilized in trending markets and are best left alone when markets aren’t trending.

Learn Forex: Trend Following Is About Capturing the Big Moves




Longer-term moves capture price moves caused by fundamental shifts

Price trends like the one seen above in the USDJPY pair is often influenced by Economic trends. The USDJPY is specifically being influenced by a plan of the Prime Minister of Japan to weaken the JPY and as an effect drive up both the USDJPY and Tokyo’s stock market the Nikkei 225. As you can imagine, economic trends take a while to develop and often persist until a shock to the system or an eventual decline of new buyers begins to see the trend to its end.
Many traders take a multi-faceted approach to the market. They do this by waiting for the technical picture or price action patterns to converge with the fundaments back-drop before taking a trade. As you can see from above, price moved above the 200-day simple moving average which is a technical buy signal as the Japanese government committed publicly weakening the JPY which helped push the USDJPY higher by over 1,700 pips in the last 12 months.

When looking at a price chart unfold, there’s a constant feeling that haunts many traders. That feeling is that the rising trend that they just entered is about to be topping out or that buy trade they just exited as a loss is nearing the bottom of its move before moving higher. However, more often most traders would expect, there is an unusually large number of strong directional price moves especially at the last leg of a move.

Learn Forex: Moves Often Continue Past Market Consensus




However, when you tend to embrace trend trading, this point of anxiety whereas you were likely trying to buy the bottom and sell the top has now become a favored point in your trading. I often share as one of my preferred that trading rules that stood the test of time price can often outlast your capital and its best to not fight the trend but rather join it. Naturally, a trend will eventually turn when the fundamental news (see #1) begins to change or when there are no longer enough buyers to push up prices to new heights but in the meantime, it’s much better to gain on the trend’s momentum that be opposing the momentum.

Money seeking the most favorable trade will often develop trends

Lately, I’ve been rather bullish on the Australian Dollar as it looks to me as the AUDUSD and AUDJPY has likely put in a bottom. However, beyond the technical argument, the yield is simply much better for the Australian Dollar than in other currencies and the map of the world is often a flow of investor funds seeking the best yield. As you can imagine, as this picture becomes clear to many, additional money will likely flow into the Australian dollar and continue the trend.

Learn Forex: AUD ties NZD as the Highest Interest Rate among Major Currencies



Now, please understand, my view on the AUD is one that is temporary working but I don’t know if it will continue. A few things could offset this positive price action like a US default of its debt or a slowdown in Chinese demand and production. However, should things continue course and money continues to seek a safe yield like it traditionally has then the uptrend in the AUD is likely to continue.

You need to be able to determine when to trade trends and when not to

If a new trader came up to me and asked what one piece of advice I had for someone who wanted to trade trends, I would simply reply that make sure you are only trading when a clear trend is present. In other words, you will likely frustrate your efforts if you try and squeeze a trend out of a clear range. While this may appear as trite advice, it’s clear that a trend system will quickly run out of purchasing power if it enters in a sideways market that continues sideways.

Learn forex: USDJPY Should Only Be Entered on a Breakout if you’re Trend Following




The purpose of trading breakouts is to enter on the resumption of the trend after the sideways price action has preceded. I recently wrote about polarity points on the charts and the concept goes that once a ceiling or floor in the market is broken, the role of that level is often flipped. Therefore, what was once a price ceiling becomes a price floor when broken and vice versa.

Closing Thoughts

You should now have a clearer understanding of why trends develop and why they can often last longer than many anticipate. As opposed to being frustrated by the presence of a trend, it’s often best to join the trend while it is in action. However, it is often best to wait for a breakout to make sure that you’re entering on the resumption of the trend so you don’t get caught up in the sideways price action that often develops after a big move and many of the traders in the prior trend are taking profits.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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Talking Points

• Renko bars help filter the noise
• Renko bars reveal clearer entries and exits
• Moving Averages can be used with Renko bars with some minor setting changes to pinpoint entries.

Seeing the trend without Forex market noise is the goal of every trader. Too many times, traders get head-faked by the twists and turns of price action.

In addition moving averages can be used to signal entries and exits as well. A couple of settings have to be changed in order to get the moving averages which are usually tied to time, to work with a chart system that is based on price.

To add a 13-period exponential moving average to the Renko chart, choose EMA from the Add Indicator menu then change “Number of periods” to 13.

Learn Forex: GBPUSD Renko Chart with Moving Average




Notice the chart above which displays both Renko bars and a 13-period exponential moving average. A simple system can be built around the Renko bars and the moving average. When Renko price bars cross below the moving average and turns red, traders can enter short and stay with the trend until the Renko bars cross back above the moving average.

An initial stop could be placed just above the last blue Renko brick. Keep in mind that in the above example, each brick is equal to five pips. In the above example, the red circles mark where the Renko bars crossed below the moving average. A trader can see that a number of pips could have been gathered as the bars stayed below the moving average.

On the other hand, when the Renko bars change color and cross above the moving average, traders can enter long placing stop just below the last red Renko brick. The above chart shows in the green circles, points were the Renko price bars moved above the moving average generating a clear buy signal.
Renko charts, without the dimension of time, may take a little getting a little used to. But once you get the hang of them, you may find it difficult to go back to the candles. Adding a moving average gives excellent signals for entry and exit. Marrying them up with other indicators can magnify the benefits of trading without noise and scary wicks!

--- Written by Gregory McLeod, Trading Instructor

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Talking Points:

• New Forex traders can get distracted by focusing on the wrong things.
• Searching for the ‘best indicator,’ having results oriented goals and searching for the ‘best time frame’ is not the way to go.
• Instead, focus on developing a consistent trading process, understanding key strategy building blocks, and adapting the strategy to fit your personal schedule.

If you could go back in time several years and speak to your prior self (knowing what you know now) what would you say? Would you warn yourself of mistakes you’ve made? Would you tell yourself things that would make your future life easier? If you are like me, you probably have a long list of actionable ideas and pieces of advice. It’s too bad that time machines don’t exist…

At times, however, I feel like I have the ability to speak to a version of my prior self during my daily webinars. Most of my online presentations are geared towards new FX traders, either teaching how to use the Trading Station platform or teaching Simple Trading Strategies. And I could see myself asking the same questions that are asked of me from the 100’s of new traders I have the honor of teaching each week.

It wasn’t too long ago when I was in the exact same chair as my students and I wish that I could tell my prior self the things I know now. But since that isn’t possible, I take pleasure in teaching new traders what I wished I knew when I began trading Forex. That’s what this article is about. The 3 most common questions I receive from new Forex traders and the answers that can give you the head start I wish I had.

Question #1 – What Is The Best Indicator?

The short answer is “none of them.” There is not a single indicator that is better than any other or that can guarantee profits. Traders that seek such an indicator are often referred to as traders looking for the Holy Grail. There is no Holy Grail, but each indicator serves a purpose and can yield profitable results when used correctly. It all comes down to understanding what each indicator does and applying them to the right situations.

One thing to also look out for are indicators that are calculated differently, but act very similar. I like to refer to them as indicator families. There are many different types of Moving Averages, Oscillators, Strength Indicators, Trend Filters, Volatility Indicators, etc. It is important to take time to learn each of the different indicator types, how to use them, and when to use them.

Question #2 – How Many Pips Should I Try To Make Per Day/Week/Month?

This is a question I receive in almost every trading webinar I present. “Is 50 pips-a-week enough to trade FX full-time?” or “Is 250 pips-a-month too lofty a goal if I am just starting out?” These questions are flawed. Not that it is bad to set goals for yourself, but results oriented goals will stifle your trading performance. This is why.

Forex markets are inconsistent. You cannot control what your results will be (period). You could have the best trading strategy in the world and still lose money if the market decides not to cooperate. So with that being said, setting results oriented goals is dooming yourself to fail. You cannot control what your results will be.

Another reason a “X amount of pips” goal hinders performance is that you are constantly out of sync with the market. During market conditions when your strategy does well, you will hit your targeted number of pips quickly, and could possibly leave money on the table if you stop trading. During market conditions when your strategy does poorly, you will be forced to continue to trade in attempt to claw your way back into profitable territory, further extending your losses since market conditions have already shown to be unfavorable. This leaves you trading more frequently in bad market conditions and less frequently in good market conditions. That is not ideal at all.

What you need to focus on are things you can control. Your goals should revolve around being consistent in following your personal trading rules and not being swayed by your emotions. You want to be able to go back and look at your trades and agree with each decision you made (even if the trades lost money). Remember, you can’t control whether or not the trade will be profitable, but you can make sure you followed the rules to a strategy you believe gives you an edge.
A great way to improve consistency in your trading is creating a trading journal.

Learn Forex: Using a Forex Trading Journal




Question #3 – What Is The Best Time Frame?

The best time frame is the one you can reasonably trade within your own personal schedule. People have found success trading all time frames from Daily charts all the way down to Tick charts. So it really boils down to how long you have each day to watch/trade the market. Here are some guidelines to get an idea of what you should look for depending on how much time you have to commit to FX trading.

0-30 Minutes a Day

With such a limiting amount of time to analyze the markets, you should focus on trading larger time frames. Weekly and Daily charts should be your focus and you should look to trade longer term moves. Trades can be open for days, weeks, possibly even months.

30-60 Minutes a Day

Having a solid hour to work with each day would allow you to start looking at smaller charts like the 4-Hour on top of looking at Dailies and Weeklies. You are looking for both medium and long term moves. Trades placed based off of a 4-Hour charts will usually close within 1-2 weeks unless you run into a longterm trend that keeps you in.

1-4 Hours a Day

At this level of time commitment, it’s safe to say you are a part-time trader. This opens up a lot of doors. You could easily trade any of the time frames mentioned above as well as Hourly, 30-Minute, and 15-Minute charts. Your trading could result in Long, Medium, or Short-term trades and you could begin placing intra-day trades (if that’s what you think fits your personality).

4+ Hours a Day

Trading full-time means you can trade the full gamut of time frames. Your choice completely comes down to personal preference. As I mentioned earlier, traders have found success trading virtually all time frames. So if you are stuck on picking a time frame, just go with one you are naturally drawn to or try out Multiple Time Frame Analysis.

Learn Forex: Multiple Time Frame Analysis




Changed Perspective

Hopefully, you will walk away from this article with a different way of looking at learning how to trade FX. Take it from someone who has been there before. There is no magic formula or Holy Grail. It’s all about trading consistency, learning how specific charting tools work and understanding what works best for you and your personality. Figuring these things out now will put you ahead of the learning curve. Good trading!

---Written by Rob Pasche

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Talking Points:

• Forex scalpers benefit from the use of technical tools.
• Manage your Stop levels using Camarilla Pivots.
• Use the S3 pivot to set a 1:2 Risk/Reward Ratio.

Camarilla pivot points can be a versatile tool, for the Forex Scalper.However, they can also be applied to produce profit targets, as well as levels for stop placements.

Below we can see a sample retracement entry on the GBPCAD at the R3 pivot, which took place earlier this morning. Today we will look at Camarilla Pivots and how they can help Forex scalpers identify placements for stop and limit orders.
So let’s get started!

Learn Forex –GBPCAD Entry with Camarilla Pivots




Setting Stops

Managing risk is one of the most important skills a trader must learn. This is especially true when scalping short term movements on Forex pairs. In the event, price changes directions we will want to exit the market as quickly as possible. Setting a stop with a support or resistance level will allow us to do exactly that.

Below we can again see the GBPCAD, but this time with a stop placement at the R4 resistance line. This is an intuitive place for a stop order when selling the previous level of resistance at R3. If price continues breaking through resistance, the market is indicating that a potential price reversal may be underway. In these instances, it is best to exit any existing positions to keep your account from accruing additional losses if price continues moving towards higher highs.

Learn Forex – GBPCAD Stop / Profit Targets



Profit Targets

Now that a stop order is set, traders will need to find appropriate profits targets for their trades. When selling resistance, it is normal to find a level at an existing level of support. Traders using a R4 stop can look to set their first target at S3. Not only is this an easy to find price level using Camarilla pivots, but is also allows the trader to utilize a 1:2 Risk/Reward ratio.

A Risk/Reward ratio is a direct look at how much profit we make when we are right, relative to the amount of losses we take when we are wrong. Referencing our example above, profit targets set at S3 would net approximately 74 pips in profit. With a stop of 37 pips at R4, this means a trader would be looking to make twice as much on a winning position relative to a loss. Even when scalping, having these ratios inline will help traders avoid the “trader’s number one mistake.”

---Written by Walker England, Trading Instructor

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Talking Points

• Renko reduces noise from violent price swing found in the Forex market
• Renko and Stochastics can help traders stay with the trend longer
• Buy and sell signals on Stochastics are easier to see on Renko charts

This is the third in a series of articles discussing Forex Renko Bars. We have gone over how to install and use this often neglected charting system. For years, Renko charts have lingered in the shadows of its cousins, the line chart, bar chart, and Japanese Candlestick chart. Even esoteric Heiken Ashi charts are better known.

But Renko is uniquely simplistic as it removes the dimension of time and volatility from the chart to allow traders to recognize the trend, make fewer trading mistakes, and stay with the trend longer. Renko also illustrates the ability of a currency to sustain consistent price moves.

Learn Forex: GBPCHF Forex Renko Chart with Stochastics




The addition of the stochastics indicator is like adding high definition stereo to an already top-of-the-line ultra high-definition television. You can trade Renko bars by themselves using the system of long after two bricks of the same color exit the trade when a brick of the opposite color appears. However, Stochastics gives an added visual confirmation that can give traders confidence in placing a trade.

Notice how slow stochastics with setting of 14, 3, 3 in the above example of the GBPCHF 5-pip step Renko chart pinpoints the exact turning points. A trader has three reasons to take a long trade; a rising uptrend, two consecutive blue bars, and stochastics crossing up from the ‘20’ horizontal reference line .The more reasons that traders can line up to support their decision to go long or short, the better the trade becomes. In addition, notice how the stochastic %K and %D lines flow smoothly from peak to valley without the erratic moves in between seen on other charts. This eliminates the guesswork and distractions allowing traders to focus on important decision making areas.

In addition, stochastics can be used with Renko to take profit on trades or to tighten stops. In an uptrend as stochastics moves above the ‘80’ horizontal reference line the indicator is in an overbought region. Traders must remember that stochastics can remain oversold for an extended amount of time and that it is not a reason to get short.

However, savvy traders may want to protect profits by moving stops just below the previous Renko “brick” or close part of the position once stochastics moves into the overbought region. The appearance of a red would be the clear signal to exit and look for the next trade.

Making a good thing better is how we can describe the addition of stochastics to Renko charts. Traders can derive the benefits of additional visual confirmation and signaling of turning points as well as money management cues. Stochastics and Forex Renko charts are a winning combination!

--- Written by Gregory McLeod, Trading Instructor

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Talking Points:

• Traders can implement a well-heeled plan taking only four hours per week
• The four-hour chart can be ideal for Forex Traders looking to trade around the clock
• We outline a full plan based around Price Action that traders can begin using today

All of the sudden, the world has gotten very small; and life is moving faster than ever before.
The internet presents a lot of benefits to the human species; but time management is not one of them. As competition for page views, viewer numbers, and attendance continues to heat up, very little in this life emphasis a slow and steady approach.
But to the trader, in many cases, that is the best way to go about speculation in markets: Slow, steady, and consistent.

But being there as a trader, and getting there as a new speculator are completely different markets. In this article, we’re going to outline a complete trading plan that will take less than four hours of a trader’s time each week. And further, this is an approach that can be focused on longer-term moves, and swings.

If you have a day job, or any other pre-existing commitments that limits your time on charts, this is an approach that can offer quite a few benefits.

The Center of the Approach

The 4-hour chart plays a special role in the FX market.
Most equity markets are open between 8 and 9 hours each day, and as such, the four-hour chart might take on less importance. After all, a four-hour chart just shows two bars for each trading session, so traders might as well just look at the daily chart.
But in the Forex market, the four-hour time frame takes on special importance. The market never closes, and traders are literally Trading the World. The four-hour candle represents half of each geographic trading session. Each of these sessions can take on markedly different tones, and that is where traders can look for potential opportunities.

In the FX Market, traders are truly ‘Trading the World’



Image taken from Trading the World

Traders can use the price movements and gyrations on these four-hour charts to analyze markets, and find potential pockets of opportunity.

Watch for the close of each 4-hour candle that you can. Using the New York close to define ‘financial time’ means that we’re seeing candles close at 5, 9, and 1 AM and PM (based on ET). If you’re using Central Time, that’s 4, 8, and 12 AM/PM while Pacific Time is 2, 6, and 10 AM/PM.
If you’re busy at the time, Mobile Applications can generally offer you what you need to perform the analysis at the close of each of these candles.

Traders can then take a ten-minute block of time upon the close of each of these four-hour candles to look for potential trade setups, while also using this as an opportunity to manage risk.

If the trader is awake for four of the six four-hour candles that form each day that would mean that the trader would need approximately 40 minutes per day to analyze charts. If time permits, an additional 10-15 minutes can be used at or around the daily close.

The total time commitment required is 40-50 minutes each day, for a total of 200-250 minutes per week (240 minutes is 4 hours).

Use Price Action to locate the strongest trends

We’ve looked at how incredibly important price action can be to traders, and in Four Simple Ways to Become a Better Price Action Trader, we walk through how easily the art of technical analysis can be performed without the necessity of indicators.

Trends in markets can be easily graded and seen with price action… by simply looking for charts to make progressively higher-highs, and higher-lows (in the case of an uptrend), and lower-lows, and lower-highs (for downtrends).

Price Action can help traders locate the strongest trends



Higher-highs and Higher-lows denote an up-trend per Price Action

Traders want to look to trade in the direction of these trends; buying up-trends, and selling down-trends. But, is it enough to just buy up-trends or sell down-trends and ‘hope’ that they continue? No. Traders can use price action to appropriate their entries into these positions.

Use Price Action to buy up-trends cheaply, and sell down-trends expensively

Once a strong trend has been located, the trader can then look to plot their entry by looking for a ‘trigger’ into the position via price action.

Once again, traders want to look to efficiently buy up-trends when price is cheap, or near support. We looked at how traders can find this support in the article, Price Action Swings.

Traders can look to buy up-trends after a recent swing low



Traders buying up-trends can wait for a ‘higher’ swing low to form before entering
Traders can look for additional confirmation of the entry by looking to the price action candles that form at or around those swings.

We looked at quite a few of these triggers in Trading Bearish Reversals (for down-trends), and The Hammer Trigger for Bullish Reversals (for up-trends).

Traders can look for bullish triggers at or around recently printed new lows



Taken from The Hammer Trigger for Bullish Reversals

Use Stops and Limits to Enforce Favorable Risk-Reward Ratios

We talk about this a lot at DailyFX, and there is a reason for it: It’s important!
One of the main premises of our price action education is that future prices are unpredictable, and as such, there is no such thing as a ‘holy grail’ or ‘can’t lose’ strategy. In the Traits of Successful Traders, The Number One Mistake that Forex Traders Make was found to be sloppy risk-reward ratios.

We examined this topic, in depth, in the article How to Identify Positive Risk-Reward Ratios with Price Action.

Traders can trigger positions with a set stop and limit order




By adding a stop and limit, and letting the trade work – the trader eliminates the possibility of making a knee-jerk reaction that they may end up regretting. It also enforces a favorable risk-reward ratio, and puts traders in the most promising spot to avoid the number one mistake that Forex traders make.

Trade Management

Since traders are looking at their charts for each four-hour bar, they have built-in trade management for each position that they take on.
Traders can use the close of each four-hour candle as an opportunity to adjust stops (particularly the break-even stop), or to take profits while also looking to trigger new positions.
Traders can take this a step further by trailing their stop in an effort to lock in gains in the event that the trend gets especially built-in. We looked at this premise in Trading Trends by Trailing Stops with Price Swings.

Traders can lock up gains to maximize trends



-- Written by James Stanley


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Talking Points

• Oscillator divergence can be used to identify Forex reversals.
• Traders will look for indicators to separate from price to pinpoint diverging markets.
• Traders can take advantage of divergence, by using a variety of trend based strategies.

Many traders look at oscillators such as RSI, CCI and Stochacstics for their overbought and oversold levels. While using these levels can be helpful to traders for pinpointing entries, there is another way to use oscillators that is often overlooked. Divergence is a potent tool that is imbedded inside of oscillators that can be used to spot potential market reversals by comparing an indicator with market direction.

Let’s take a look at how divergence works, using the AUDUSD Daily graph seen below.
Learn Forex – AUDUSD Daily Trends



The word divergence itself means to separate and that is exactly what we are looking for today. Typically Oscillators such as RSI will follow price as the AUDUSD declines. So when the AUDUSD goes lower, usually so will the indicator. Divergence occurs when price splits from the indicator and they begin heading in two different directions. In the example below, we can again see the AUDUSD daily chart with RSI doing just that.

To begin our analysis in a downtrend, we need to compare the lows on the graph. In a downtrend prices should consistently be making lower lows. That is exactly what the AUDUSD does as it declined as much as 1734 Pips between March and August 2013. To find divergence, it is important to mark the dates of these lows as we need to compare them with the lows created on the RSI indicator. Now notice how, we can see RSI making a series of higher lows at the same points. This is exactly the divergence we are looking for!

Learn Forex – AUDUSD Bullish Divergence



Once spotted traders can then employ the trend based strategy of their choosing while looking for price to swing against the previous trend and break to higher highs. It is important to note that when trading price reversals, indicators can stay overbought and oversold for long periods of time. As with any strategy traders should be using stops to contain their risk. One method to consider in a downtrend is to employ a stop underneath the current swing low or other supported area of price.

---Written by Walker England, Trading Instructor

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Talking Points

• How To Understand the Basic Pattern
• How To Understand Corrections vs. Impulses In Markets
• How To Understand Fibonacci In Relation To Wave Development

“I attribute a lot of my own success to the Elliott Wave approach.”
-Paul Tudor Jones, Tudor Jones Capital

Elliott Wave is a great trading tool for trading trends. However, it’s not as confusing as a lot people make it out to be when you consider the primary objective of the tool. Elliott Wave is meant to put the current move of the market in context for you, the trader.

Putting the market in context for you is of great help. For starters, if you know a market that has recently been in a strong trend is correcting, you can look for a resumption of the prior trend to enter at a favorable price. Also, you can look to see if the pattern is starting to break down to see if the prior trend has exhausted itself, and look to either take profits or enter a new trade in the direction of the new trend.

Understand the Basic Pattern

Learn Forex: The Overall 8-Wave Elliott Wave Cycle



The picture above is a mock-up that shows the progression of markets as seen in Elliott Wave. As you can see, the market is often broken up by strong trends and minor moves against the trend. The with-trend moves are known as impulse or motive waves and the counter trend moves are known as correction.

Another key aspect of Elliott Wave is that trends are fractal. Simply put, that means that each impulsive wave can be broken down into 5 smaller waves and each correction can be broken into 3 smaller segments of a counter-trend move. However, it’s often not overly necessary to label every single aspect of the wave.

How to Understand Corrections vs. Impulses in Markets

Learn Forex: 5-Wave Impulse & 3-Wave Corrections unfolding in GBPUSD




As illustrated above, the trend or impulse unfolds in 5-waves whereas corrections unfold often in a 3-wave pattern. You’ll often hear Elliott wave fans discussing trading based on 5-s & 3-s and that is because they identify the trend and countertrend moves based on the unfolding of a move in 5 & 3-wave patterns.

Furthermore, in understanding the basic 5-wave impulse or trend, you can be on the lookout for a 3-wave correction or developing correction. The purpose of looking for a correction is that as the trend resumes, you can look for the correction to be losing steam so that you can enter at a good price. What many traders who are unfamiliar with Elliott wave often end up doing is chasing the price or enter on the extension of the trend right before the correction begins. This causes them to get stopped out because they did not understand the context of the market and current trend when they entered the trade.

When looking at the 5-wave pattern and 3-wave correction to get context, you can see how the breaking down of GBPUSD has us looking for a correction to continue. Therefore, I’m taking the context as provided by Elliott Wave to get a better feel for GBPUSD. Once this corrective move to the downside completes, then I can look for a buy on a resumption of the overall trend to higher prices.

If you’re not trading GBPUSD, you can take a look at the chart you’re trading and see if you can identify any 5-wave or 3-wave structures. That will help you grab a context of the current market so that you can look for the maturity of the current trend or ideally the exhaustion of the correction. After you’ve identified a current market as ready to resume the trend, you can then look to Fibonacci numbers in order to see where the market is likely go to go as according to Elliott Wave.

How to Understand Fibonacci In Relation To Wave Development

“When R.N. Elliott wrote Nature’s Law, he explained that the Fibonacci sequence provides the mathematical basis of the Wave Principle”
-Elliott Wave Principle, Frost & Prechter pg. 91

Once you’ve been able to get context for the current trend, you can then look to Fibonacci numbers in order to find price objectives within Elliott Wave. In other words, the reason why Elliott Wave traders often utilize Elliott Wave is because you can have definitive levels as to where the correction may end with Fibonacci Retracements. Furthermore, you can have price objectives by utilizing the Fibonacci Expansion tool.

Learn Forex: Fibonacci Provide Price Objectives within Elliott Wave




One key thing to note when utilizing Fibonacci retracements within Elliott Wave is that there are levels to watch out for but rarely a level that the market must hit. Therefore, you want to focus on price action near levels like the 61.8% on a wave 2 and a 38.2% on wave 4. If you see a lack of conviction past these levels then you can look to a resumption of the overall trend off of these levels.

In terms of price objectives, you can use the Fibonacci expansion tool. The expansion tool takes three points on the chart to project the exhaustion of the next impulse. The most-commonly used targets are the 61.8%, 100% & 161.8% expansion. This simply means that this impulse is either 61.8%, 100% or 161.8% of the prior wave and simply shows you the progression and strength of the current trend.

Closing thoughts

Elliott can be a headache if you worry about labeling every wave and every correction. Instead, I’d recommend focusing on the big picture. In other words, are we in an impulse or a correction? More importantly, if we’re in a correction that’s about to be exhausted, where can we enter on the resumption of the trend?

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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Talking Points:

• Numerous headline events have worked to create confusion amongst markets
• This confusion can mean wild, erratic, and unpredictable price movements
• We go over three ways traders can look to approach such environments

Markets are never predictable. This much is a given.

But there are certain times in which markets may seem even more uncertain than usual. The current stance across global markets is one that many investors and traders have allocated to being, well, ‘crazy.’

First we had the Federal Reserve Taper Conundrum. Then we had the shutdown. And while it appears we may be nearing closer to a resolution on the shutdown and debt limit, the environment is anything but certain.
The Tapering of QE isn’t really a question of ‘if’ so much as ‘when.’ And even once the taper begins, nobody really knows what will happen next. We don’t exactly have a comparable period of history that we can look back to in order to say: ‘The last time the largest economy in the world slowed their injections of $85 Billion per month, this and that happened, so this is what we can expect.’

So, to say that there is uncertainty in the market can be a bit of an understatement. And in your career as a trader, this uncertainty will not be an isolated event. After all, if trading were easy, everybody would do it… and then there would be no one left to actually produce goods and services in the economy for us to speculate on.

Method #1 – Adjust Risk-Reward Ratios to account for additional volatility

We saw the profound impact of risk and reward in the DailyFX Traits of Successful Traders Research. In The Number One Mistake that FX Traders Make, we saw the reason why so many traders fail. And these are generally the same things that are the culprit for trader failure in other markets as well. And that is the fact that traders lose so much more when they are wrong than they win when they are right.

In some cases, the difference is so profound that traders can be winning in 70% of their trades – and STILL be losing money.

Traders lose considerably more (in red) when they are wrong, than they win when they are right (blue)




Markets are unpredictable as-is, but to add the additional pressure of needing to win 75-80% of trades, speculators are setting themselves up for failure because, likely, they will NOT be winning that often with regularity.
So, the thesis – the way to avoid The Number One Mistake FX Traders Make – is to look for a bigger reward than what is being risked on any individual trade.

This way, even if a trader is getting a 50/50 chance of being right on any individual trade, they can still have a chance at grasping a net profit in the market.

When markets are even more uncertain, they need to begin assuming an even smaller chance of being ‘right’ and winning trades. And while this may sound defeating, it doesn’t mean that it can’t be worked with. It simply means that traders need to be MORE aggressive on their risk-reward ratios during uncertain times in the market.
The reason for this is logical: In an uncertain market, prices can move quickly for AND/OR against you. Essentially, when markets are uncertain, we have to begin pricing in a ‘surprise.’

And by looking for reward ratios of at least 2 times the amount being risked, it allows us to capitalize on the situations in which the surprises work out in our favor while mitigating the damage of the surprises that work against us.

Method #2 – Back up the chart and look at the bigger picture

This method works with a similar theme from the earlier method, and that is that the more uncertainty that may be in a market, the more wild and volatile short-term price movements may become.
Scalpers may be challenged to see the same momentum or trends on shorter-term charts as catalysts and stimuli (the same themes bringing uncertainty in the market) may cause erratic price movements.
One simple way to obviate all of the short-term craziness that can be seen in uncertain markets is to move back on the chart and look to trade with longer time frames. This allows the trader to get a ‘birds-eye view’ of that market, and to make decisions accordingly with the information given.

To do this, a few additional adjustments would be warranted.

Since a longer time frame is being traded, speculators can also investigate using a larger stop based on that longer time frame; and because a larger stop would be used, a proportionately larger profit target would be necessary.

Traders can look to longer time frames to obviate volatile short-term uncertainty




So, with this method – the trader is essentially forcing themselves to use a longer-term outlook in anticipation of the uncertainty plaguing the market to clear up.

Method #3 – You don’t HAVE to trade if you feel uncertain

A favorite line of my friend and colleague Jamie Saettele is ‘you don’t have to have a trade on…flat is a position too.’ Meaning – as a trader, you don’t ALWAYS have to be trading something.

Jamie does a really great job of this. He’s a purely technical trader, and in many cases absolutely abhors the news flow that permeates around markets. Unfortunately, he’s stuck next to Michael Boutros, David Song, Chris Vecchio, David Rodriguez, and me on the desk here in New York, and we talk markets all day, every day.

Jamie simply puts his headphones on to ignore our desk banter, and scans markets until he finds something to trade.
And if he doesn’t find any setups that strike his fancy, he stays flat by not buying or selling.



If you haven’t yet built up a repertoire to know when to turn things off or not take a position, this can be a great time to work on your trading strategy.

If you don’t yet have a trading plan, these periods of uncertainty are optimal periods for creating one. This can help denominate when you will trade, and when you won’t. By many accounts, a trading plan is a necessity for success
Further, this can be an excellent opportunity to test out your strategy. You can even use down-time in the market to simulate a trading strategy by using Manual Back Testing. This can be one of the best uses of time for traders; not only to get comfortable with a strategy but to maximize ones trading time, even when markets are uncertain and there may not be many comfortable setups available for the trader to look to take advantage of.

--- Written by James Stanley

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